Euro at three day high despite Catalonia stand-off

The euro climbed to a three-day high on Thursday on hedging-related demand from bond investors before a European Central Bank policy meeting next week, though political uncertainty around Catalonia crimped gains.

"Frankly there is no fundamental driver for the euro move higher especially in the light of the overnight news from Spain and markets will be in a holding pattern around broad levels until we see more clarity," said Lutz Karpowitz, an FX strategist at Commerzbank in Frankfurt.

The single currency rose 0.3 per cent in early trades to $1.1822 to its highest level in three sessions.

But more gains will be hard-fought given the euro is coming up against some technical levels around the $1.1880 line, the 50 per cent trading range between September to October.

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Catalonia’s leader pledged to press ahead with his independence bid if Spain moves to suspend the region’s autonomy, a regional government source said on Wednesday, hours before a deadline over keeping the euro zone’s fourth-largest economy united.

While the euro has remained broadly impervious to political developments in recent weeks, investors say any unexpected developments could drag the single currency lower.

The European Central Bank will say on October 26th that it will start trimming its monthly asset purchases to €40 billion from €60 billion in January, according to a Reuters poll of economists.

Elsewhere, the dollar hit its highest in about two weeks against the yen supported by this week's rise in US bond yields, with the market's attention turning to who will next lead the Federal Reserve and this weekend's Japanese election.

The dollar index, which tracks the greenback against a basket of six major rivals, was flat on the day at 93.32.

It rose as high as 113.095 yen in early Asian trade, its strongest level since October 6th. The dollar last changed hands at 112.99 yen, steady from late US trade on Wednesday.

This week’s rise in US bond yields helped lend support to the greenback. The two-year US Treasury yield rose to its highest since November 2008 on Wednesday even though real yields on ten-year maturities have declined.

Sterling held steady at $1.32 as traders awaited retail sales data for further clues about the health of the UK economy after dovish comments by policymakers this week prompted some doubts over the future trajectory of interest rates.

The pound slipped to a five-day low on Wednesday after weak UK wage growth data. The retail sales data may bolster expectations of monetary tightening.

Financial markets have firmly factored in a rise in borrowing costs at the next Bank of England policy meeting in November, and are expecting rate hikes of more than 50 basis points over the next year.

The British pound edged lower to $1.3193 in early trades on Thursday. Investors are also closely following a two-day European Union summit in which British Prime Minister Theresa May will try to unlock the stalled Brexit talks.

She is under pressure from some in her party to threaten to walk away from the talks.

“There’s an awful lot of political noise going on and if sterling reacted to every single political sound bite, it would look like one of those ticker graphs when someone’s having a heart attack,” CMC Markets analyst Michael Hewson said.

-Reuters